Fonterra seeks clear mandate

ALI TOCKER

Last updated 13:13 01/06/2012

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Fonterra's board will be looking for a clear mandate from its 10,500 dairy farmer shareholders when they vote on the dairy co-operative's proposed Trading Among Farmers (TAF) scheme on June 25, Fonterra chairman Sir Henry van der Heyden said.

Dairy farmers supplying Fonterra throughout the country will receive shareholder special meeting voter packs in the next few days providing further detail on Fonterra's new proposals on how TAF will operate.

Van der Heyden said Fonterra's new proposals include to decrease the threshold on the size of the Fonterra Shareholders' Fund (public investment units) from 25 per cent to 20 per cent of total shares, and to decrease the number of dry shares on issue from 25 per cent to 15 per cent.

Robust modelling and much deliberation by the board had informed the recommendation for a lower 20 per cent fund threshold, which struck the "right balance between flexibility to manage seasonal milk fluctuations and controls to manage risk", he said.

A vocal bloc of farmers has been opposed to the TAF scheme, which would enable farmers to trade shares in the co-operative among themselves instead of with Fonterra, and which would offer NZX-listed dividend-carrying investment units to the public.

Farmers opposed to TAF are concerned they could lose control over their co-operative, with non-farmer-shareholder investors expected to exert influence even though they will have only economic rights in Fonterra, not voting rights.

Van der Heyden said that while the TAF resolution at the special shareholder meeting will be an ordinary resolution requiring a 50 per cent-plus majority to be passed, the board will not proceed unless it has a much stronger mandate than that.

"I want a mandate that will unify the co-operative around this proposed evolution in our capital structure," he said.

"This is the final vote in a long process. Shareholders have given us strong support in the earlier stages and that is what the board is looking for this time.

"TAF offers a means of sustainably protecting 100 per cent farmer control and ownership into the future and reducing risk to our co-operative, so we're looking for a mandate that enables the board to continue to work towards protecting and strengthening Fonterra."

Van der Heyden said the key concerns of farmer shareholders rested on two fundamental points - preserving 100 per cent control and ownership, and the integrity of the Farmgate Milk Price.

"Accordingly, we have proposed a range of resolutions for farmer shareholders to vote on that will tighten limits on the size of the Fonterra Shareholders' Fund, which is fundamental to 100 per cent farmer control and ownership, and preserve the integrity of the Farmgate Milk Price."

These special resolutions would require constitutional change and would therefore involve a 75 per cent vote.

"While we intend to operate the Fund at a size of 7 per cent to 12 per cent of total Fonterra shares on issue, we do need breathing room to take account of seasonal changes in milk volume," he said.

"Milk production is driven by weather - for example this year we anticipated 3 per cent milk growth but got 10 per cent. Add 10 per cent growth to our 7 per cent to 12 per cent ideal Fund size and a 15 per cent cap is too restrictive."Over time the Fund would be managed within the target size range, but the constitutional limit needed to be higher to allow for seasonal shifts in milk production.

"It's a combination of hard maths and good judgement that leads us to recommend 20 per cent," van der Heyden said.

Another key resolution was to enshrine protections for setting the Farmgate Milk Price in the co-operative's constitution so that future changes would require a 75 per cent-plus majority.

"The proposal is that the Shareholders' Council's appointment to the Milk Price Panel be added to the constitution," he said.

"This underpins the integrity of the Farmgate Milk Price going forward. Unlikely as it might be, were a future board to bow to pressure from investors in the Fund, this would become obvious and the council's constitutional ability to protect the process provides a further assurance for farmers."

Commerce Commission oversight of the Farmgate Milk Price formula - a process being worked through independently of TAF - provided a further safeguard in terms of transparency, van der Heyden said.

The material being distributed to farmers in the shareholder special meeting voter packs includes:

the notice of special meeting of shareholders, including proposed resolutions

a copy of the Blueprint, the masterplan document for Trading Among Farmers

A due diligence report provided to the board for its May 2012 meeting and

A Trading Among Farmers summary sheet.

Van der Heyden said the co-operative would hold a series of shed meetings early this month, once farmers had received their TAF voter packs, to ensure farmers could ask questions of Fonterra's board and management, as well as the board's due diligence committee.

"There's a lot of information to consider, and we're taking every opportunity to ensure that farmers are as informed as they can be when they vote on June 25," he said.